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If I started a Roth IRA in 2011, but start contributing to a Roth 401k and reach the MAGI threshold for additional contributions in 2012 to my Roth IRA, will I eventually be able to move my 401k Roth to my Roth IRA account if I eventually leave my employer? If I start contributing to a traditional IRA are there any restrictions with converting that to a Roth IRA?

I am young and I don't understand the impact of reaching the MAGI threshold and how it will affect my future investments and my current Roth IRA.

Thanks.

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If you have a Roth 401(k) those funds, as taxes were paid on them already, may be rolled over into a Roth IRA when you leave.

Regular 401(k) contributions can be rolled into a standard IRA, as they will be taxed when withdrawn.

Reaching the MAGI threshold doesn't affect your accounts in any way other than eligibility to contribute to a Roth IRA, or eligibility to deduct contributions to a traditional IRA from your taxes.

Converting a traditional to a Roth later is no longer subject to income limits, but you do pay taxes on the balance converted (not on all balances as was indicated by another poster). There are methods to reduce the taxable balance at transfer time using complex corporation ownerships and such, but they are complex, error prone, and not well tested in court. Unless your balance is considerable, I'd steer clear and just pay attention to whether you think your income taxes will be higher when you retire or now, and use that to make the decision, and pay the taxes if you do convert.

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You shouldn't think about the income limits for Roth IRAs as preventing you from putting money into a Roth IRA. You can contribute to a (non-deductible) Traditional IRA and then immediately convert that to a Roth IRA (the so-called "backdoor" Roth IRA). There are no income limits. And (assuming you did not have any prior deductible IRAs) there are no taxes, so it's identical to a normal Roth IRA contribution.

  • I did not know about this backdoor Roth IRA as a way to surmount the $4000/yr limit. I already have a very small, abandoned Roth IRA, but that doesn't matter right? What's the point then/What might be a disadvantage of opening a non-deductible Traditional IRA instead of Roth IRA? – Marcos Mar 8 '12 at 20:48
  • No, it does not circumvent the contribution limit per year (which is still the same, $5000 for all IRAs). It circumvents the income limit for contributions for Roth IRAs. And it doesn't really matter that we're opening a non-deductible Traditional IRA; it is temporary; we are converting it immediately to a Roth IRA. – user102008 Mar 9 '12 at 0:32
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When converting from a traditional IRA to a Roth, all IRAs are considered when calculating the tax due on any pretax deposits or growth. For those with no IRA yet, a deposit and immediate conversion has no tax consequences. But, if you are young and have such high income, you should consider the standard 401(k). At least for some portion of your savings. Going 100% Roth makes no sense, with the rare exception of when you have a pension do great you retire in the same tax bracket as when you worked.

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